Via this post on the California Corporate & Securities Law blog, which is maintained by Keith Paul Bishop of Allen Matkins, I learned of the recent Ninth Circuit opinion in WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc. (go here for a PDF copy).
This dispute involved a second amended and restated right of first refusal and co–sale agreement—what a mouthful!—between Spot Runner and its founders (the defendants) and its investors, including WPP (the plaintiff). Here’s the provision at issue:
Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by written instrument signed by the party against whom enforcement of any such amendment, waiver, or discharge or termination is sought; provided, however, that the holders of sixty percent (60%) of the Shares held by the investors voting together may waive, discharge, terminate, modify or amend, on behalf of all Investors, any provisions hereof.
I’ll let Keith Paul Bishop take it from there:
The plaintiff generally alleged that the the executives of a privately held company, Spot Runner, Inc., solicited the purchase of shares by the plaintiff at the same time that those executives were selling personally owned shares and when the company was incurring substantial losses. Under Rule 10b-5(b), a defendant can be liable for an omission of material information if she has a duty to disclose. The plaintiff argued that the defendants had a duty to disclose based on a Right of First Refusal/Co-Sale Agreement. In response, the defendants contended that the notice had been waived pursuant to a provision in the agreement that allowed waivers by “the holders of sixty percent (60%) of the Shares held by the investors voting together”. According to the defendants, two other investors who owned the requisite 60% had waived the plaintiff’s right to receive notice. The plaintiff, however, contended that the “voting together” language in the agreement required that all investors participate in the vote. In other words, there had to be be an opportunity for a vote by all shareholders.
So what we have here is, yet again, syntactic ambiguity. Here’s what the court said (footnote and citation omitted):
Although the language of the ROFR/Co–Sale Agreement is somewhat ambiguous, WPP gives the far more natural interpretation. Importantly though, and aside from a resolution of the actual meaning of this provision of the Agreement, where the language of the contract is unclear, a court must look to evidence outside the pleadings. As such, resolution of the disputed meaning of the contract on a motion to dismiss is inappropriate. If WPP’s interpretation of the contract proves to be the intended meaning, then it will have adequately shown that an opportunity for a vote by all shareholders was required before the rights in ROFR/Co–Sale Agreement could be waived; that this vote did not occur; and accordingly, that the Founders violated a duty founded upon the Agreement to properly disclose their sales in the secondary offering.
But I’m not particularly interested in rummaging through the entrails of the dispute. Instead, I was wondering how I’d have drafted the provision in question so as to avoid dispute. I think getting it right involves more than avoiding syntactic ambiguity.
My main issue is with the notion of a vote of shares. The shareholders of a corporation vote their shares at any meeting of shareholders, or act by written consent. That’s not what’s contemplated in the contract. Instead, the provision in question concerns contract rights of the shareholders—in effecting a waiver, the shareholders would be acting on their own behalf, rather than on behalf of the corporation, so it seems odd to invoke the notion of a vote of shares. Furthermore, Spot Runner’s certificate of incorporation apparently didn’t require a vote of shareholders in this context.
And requiring a shareholder vote would have been not only unnecessary but also pointless and confusing. If two shareholders controlled the necessary shares, requiring a shareholder vote would have simply added pointless procedural hurdles. And if that vote weren’t covered by the certificate of incorporation, what procedures would be followed?
So I would have eliminated any reference to a vote of shares. Here’s my version:
No waiver of any provision of this agreement will be effective unless it is in writing and signed by the one or more parties granting the waiver, except that a waiver signed by holders of at least 60% of the then-outstanding Shares held by the Investors will be deemed to constitute a waiver by all Investors.
[And here’s my version revised on September 7, 2011, to reflect Westmorlandia’s comment:
No waiver by any party of any provision of this agreement will be effective as to that party unless it is in writing and signed on behalf of that party. A waiver signed by one or more Investors holding at least 60% of the then-outstanding Shares will be deemed to constitute a waiver by all Investors.]
I also got rid of any mention of amendment—I’d rather address that in a separate section. And instead of the cumbersome “the party against whom enforcement of any such … waiver … is sought” I used instead “the one or more parties granting the waiver”.
I did this on the fly, so I may have missed something. If I screwed up, I’m sure you’ll let me know.
9 thoughts on “How Would You Have Drafted It?”
I agree with you regarding the vote – it seems a very problematic way to deal with the issue. I also agree that dealing with amendment and waiver separately is usually preferable.
I would go for this:
“No waiver of any provision of this agreement by any party will be effective unless signed on behalf of that party, except that a waiver signed on behalf of Investors holding at least 60% of the Shares then in issue will be deemed to constitute a waiver by all Investors.”
– There seemed to be a circularity in saying the waiver needed to be signed by the one or more parties granting the waiver – if they haven’t signed it, they aren’t granting it, so how many parties need to sign to make a waiver effective?
– I also thought it should be fine in principle for one Investor to waive a provision on behalf of itself regardless of the other Investors that benefit from the provision. It should only be where the “60%” provision is in play that there should be any requirement for multiple Investors to sign to make a waiver effective.
– I think it should be fine to delete “it is in writing and”, because one cannot sign an oral waiver?
– I usually prefer “on behalf of” when talking about execution, as otherwise some lawyer will try to argue that a contract signed through agency (almost always the case with companies) was not signed “by” the company.
– I am assuming that the Shares are only held by “Investors” (which seems to be the case), but if not then your wording would be better.
Tangentially, there are also some interesting questions around whether provisions requiring waivers to be in writing are actually effective – if a waiver is made orally and then relied on, the waiving party may be prevented from enforcing the term through estoppel, for example.
W: Regarding your circularity point, you can grant a waiver without it being effective. But more to the point, your wording is more economical.
I take your point about having each party’s waiver be effective. If multiple parties are waiving and they want to provide that no party’s waiver is effective unless everybody waives, they’d have to make that explicit.
You’re correct that you can’t sign an oral waiver, but I’m still inclined to make it explicit that the waiver itself has to be in writing.
I’ll give you “on behalf of”. That’s probably worth a blog post unto itself!
I’m not sure whether the Investors own all the Shares; out of laziness, I’ll stick with that assumption. I followed the lead of the original version, but it may well have been mistaken.
I’ll revise my version to reflect your improvements. Thanks!
Actually, one can sign an oral waiver. Under the Uniform Electronic Transactions Act, a voice mail or other sound recording can be a “record”, and records have the same status as a writing. A record can bear an electronic signature, which UETA defines as “an electronic sound, symbol, or process attached to or logically
associated with a record and executed or adopted by a person with the intent to
sign the record.”
So if I leave you a voice mail that includes “This is Jack Levey”, I have electronically signed the record. UETA permits a contract to be formed entirely through an exchange of voice mail if the parties evidence an intent to be bound by the electronic record. Even in contracts for the purchase and sale of real property, UETA recognizes these records as sufficient to satisfy the statute of frauds.
Ohio’s UETA can be found at Revised Code Ch. 1306. http://codes.ohio.gov/orc/1306
This is picayune, but shouldn’t we be? I question “will be deemed” on two heads:
First, it’s passive, missing its “by-agent.” Who is to do the deeming? The use of “will” rather than “shall” suggests that the parties are not the ones who will be doing the deeming.
Second, assuming that its a court that will be doing the deeming, I thought the tactful and diplomatic way to tell courts what to do is to use the formulation “is to be,” as in “is to be deemed” or “is to be construed.”
If “will” is the command word that places a duty on someone other than the subject of the sentence, then the “will” formulation places the “duty to be deemed” on the sufficiently signed waiver. But non-sentient objects cannot have duties, as you have pointed out.
Is that a wrinkle to be ironed out, or do I have it wrong?
There’s no way to convert “will be deemed” into the active voice. And I’m OK with that.
In this case, a court won’t be doing the deeming. Instead, it’s the parties that are establishing, among themselves, a legal fiction.
I use “will” because it’s language of policy with respect to a contingent future event. As part of my categories-of-contract-language analysis, I recommend that you use “will” only for that purpose.
And incidentally, I’ll probably be axing from the third edition of MSCD my “is to be” recommendation. That’s because language of belief and language of intention express more clearly what’s involved. Instructing a court, even politely, to take a given position is problematic.
“Instructing a court, even politely, to take a given position is problematic.”
When I’ve said something that treads too far into this area, I’ve used the language of policy and then also added a statement of the parties’ intent to “clarify” for the court what the intention of the parties is on the specific point. My thought is that if the court rejects the language of policy, which should be a clear communication of intent, the specific “that parties intend that…” is there as a backstop.
You might be aware that I addressed this in a 2017 article: https://judicialstudies.duke.edu/wp-content/uploads/2017/08/Judicature-Fall2017-contracts.pdf
I was not aware of that but I read every word yesterday! Thank you!